Sundaram Finance (SFL) continues to take a hit on its bottomline. After having reported a 15% fall in the first quarter earnings, the company's profits in the second quarter dropped by 21%. Its topline too remained flat. Tough economic environment has severely impacted the company's first half performance.
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While SFL's other income staged a sharp rise of over 200%, interest margins witnessed a decline of over 700 basis points to 27%. The company's cost to income ratio also increased to 42% in 2QFY01 from 38% in the comparable previous quarter. A significant rise in interest cost of the company impacted key financial ratios.
During the quarter, SFL's provisions figure grew by 35% indicating a deterioration in its asset quality. Its NPA to asset ratio, which stood at 4% as on March 2001, is likely to increase, if asset quality is impacted further due to a downturn in the economy. The company's core business of vehicle financing remained subdued during the first half of the year, as commercial vehicle sales grew by a marginal 2% during the period. The company is however, confident of achieving healthy growth rates in retail finance. The competition is hotting up in this area too and it would be a challenge for SFL to achieve targeted growth in retail finance.
The company's capital adequacy ratio at 22.7% is however, well above the benchmark of 12% prescribed by the RBI. This would allow it to expand its asset base in the coming years without raising fresh capital.
At the current market price of Rs 97, SFL is trading at a P/E of 6x and Price/Book value ratio of just 0.5x. The company has maintained its dividend ratio to 60% in the past three years. The non-banking finance sector (NBFCs) is marred by increasing competition from banks and financial institutions whose cost of borrowings is relatively less and they have a better reach. This has resulted in a downturn in business activity of key NBFCs including SFL and Kotak Mahindra Finance.
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